Customers miss out as Pru holds on to £9bn

Keeping the cash: Nick Prettejohn said Prudential needs a cushion against crashes

Prudential risked a row with MPs, regulators and its own customers today when it decided to hang on to almost £9 billion of funds in its so-called inherited estate.

By arguing that the money is a vital cushion against stock market crashes and other financial downturns, the Pru is playing it safe - living up to its name, perhaps.

It has been under pressure for several years to come to an arrangement on the money, which has built up in its giant £79 billion with-profits fund, and which the insurer does not expect to pay out to policyholders.

The 4.5 million customers that have investments in with-profits funds were hoping for a windfall of a few hundred pounds each.

Prudential pointed to the superior performance of the fund in defence of its decision. It has returned 134% over 10 years, easily outperforming the FTSE All Share and the FTSE 100 indices.

Nick Prettejohn, chief executive of the Pru's UK and Europe arms, said the decision was not directly related to the credit crunch.

But he added: "The current market volatility is a good example of why we need a strong, inherited estate. We take a very long-term view and we need a strong fund."

The Financial Services Authority and MPs on the House of Commons Treasury Select Committee have accused the insurer of dragging its heels on this issue.

The suspicion has always been that insurers were looking for ways to skew any payouts towards shareholders.

With banks in disarray because of a lack of capital, the Prudential may find that its stance gets a more sympathetic ear than it would have done before the credit crunch.

Norwich Union, the insurer owned by Aviva, is working on its own distribution, and has been reportedly close to an announcement for some time.

Aviva's inherited estate is much smaller at £3 billion, and is attached to some funds that are closed for new business. This may leave it easier for Aviva to make a windfall payout.

With-profits funds work by smoothing out returns from the stock market. A bonus is added to policies every year, with some held back in boom times so policyholders can still be rewarded when shares are on the slide.

Asked why it had taken so long to reach a conclusion, Prettejohn replied: "It's a complex process. We are looking at 250 different products and scenarios over 40 years.

"This is not a fund to tear down to the bare minimum."

Peter Bloxham, the lawyer hired to be an advocate for policyholder interests, is thought to be supportive of the Pru's decision.

Prudential was formed in 1848 and has assets of £267 billion.

Policyholders don't need to do anything as a result of today's announcement. Those with queries can phone the helpline, 0845 300 2641.